Question Details

Assuming a fixed exchange rate what is the Canadian nominal interest rate 



1. "Analysts are wondering if Canadian yields can fall while U.S. yields are rising." This is 
a) impossible if the risk premium is constant 
b) possible if Canadian inflation falls while U.S. inflation rises 
c) possible if Canadian money growth exceeds U.S. money growth 
d) impossible because real interest rates are approximately equal everywhere 
2. "Greenspan stated that what we have seen in the past is that the willingness of foreigners to hold dollars is closely related to their sense of soundness of our economic policies." Soundness here most likely means low 
a) taxes b) inflation c) unemployment d) real interest rates 
3. Suppose the current exchange rate is 200 yen per dollar, the U.S. interest rate is 6 percent, the Japanese interest rate is 4 percent and there is no risk premium. What do you expect the exchange rate to be a year from now? 
a) 195 yen/$ or less b) more than 195 yen/$ but not more than 200 yen/$ 
c) more than 200 yen/$ but not more than 205 yen/$ d) more than 205 yen/$ 
4. Suppose the current exchange rate is 4 francs per dollar but is expected during the next year to rise to 4.4 francs per dollar. If the current U.S. interest rate is 6 percent, what should be the French interest rate on a comparable security, assuming a zero risk premium? 
a) 6% or less b) more than 6% but not more than 10% 
c) more than 10% but not more than 14% d) more than 14% 
5. Suppose inflation in the U.S. is 8 percent, its real interest rate is 3 percent, and the real interest rate in Canada is 4 percent. Assuming a fixed exchange rate what is the Canadian nominal interest rate ? 
a) 9% or less b) more than 9% but not more than 10% 
c) more than 10% but not more than 11% d) more than 11%



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